Federal sleuthing in penny stocks: Who hired the accountant, and just how deeply was he involved?

THERE is a sexy story going on in penny-stock land, one that may deserve a writer like Elmore Leonard to chronicle it. But Federal regulators and prosecutors are doing their best, and not without a certain deadpan humor.

A few chapters have already been written in this tale of crooked brokers, corrupt accountants, Internet touts and, unfortunately, defrauded investors. But each week seems to bring new developments, and there will be more exciting installments in the not-too-distant future.

The most recent chapter of the story concerns an accountant-for-hire by the name of Merle S. Finkel, who pleaded guilty in Las Vegas, Nev., yesterday to one count of conspiracy to commit securities and bank fraud. He was also kicked out of the accounting business, at least for purposes of certifying the financial statements of public companies, in an agreement with the Securities and Exchange Commission.

Neither Mr. Finkel nor his lawyer could be reached for comment yesterday; Mr. Finkel, who is known as Mickey, is said to be cooperating with Federal investigators.

The reason Mr. Finkel is in such hot water is that he created fake financial documents for two Las Vegas companies that sold shares to the public, according to a complaint filed in United States District Court in Las Vegas. These companies are 21st Century Health and Combined Companies International.

Mr. Finkel also certified the financial statements of Systems of Excellence -- known as SEXI from its stock symbol -- the day he was hired, and without actually reviewing the books, according to the S.E.C. The commission says that the case is one of the first securities-fraud cases involving Internet stock touting; glowing reports in an electronic newsletter pushed the stock up to almost $5 a share (it now trades at 2 cents).

Indeed, it appears that the former chairman of SEXI, Charles O. Huttoe, led prosecutors to Mr. Finkel. Mr. Huttoe, who has been cooperating with law officials, was sentenced in January to as much as 46 months in prison under a plea agreement, but has not yet been jailed, his lawyer, John Fedders, said.

Calling Mr. Finkel ''an accountant who sold out his office,'' the S.E.C. enforcement director, William R. McLucas, said the case ''indicates the damage accountants can do, because they hold the ticket to access to the stock market,'' and adding, ''He caused millions of dollars of investor losses.''

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But Mr. Finkel is only one figure in a much broader Federal inquiry. ''The investigation now centers on who recruited and compensated Mr. Finkel for falsifying key financial statements,'' said Christopher Bruno, a special assistant United States attorney working on the case. Other areas investigators are looking into, he said, included ''the manner in which securities were manipulated, specifically the involvement of certain broker dealers in fraudulent trading practices as well as secret payments to certain securities professionals.''

Court records, S.E.C. documents and people familiar with the investigation suggest that it centers on the Davis family of Las Vegas: Barclay; his wife, Loretta, and his son Joe. They are are the founding and controlling figures of 21st Century Health. Barclay and Loretta Davis also received some of the illegal proceeds of the Systems of Excellence scheme, according to an S.E.C. complaint filed in December.

The lawyer for Barclay and Loretta Davis said that neither he nor his clients would comment on the case. Joe Davis said he could not discuss anything that involved 21st Century Health before October, when he became president. The company now has ''a lot of good things'' going on, he said, pointing to a number of announcements of new products and business combinations.

But questions about those very announcements helped prompt the S.E.C. to suspend trading in 21st Century's stock on Feb. 27. Trading had also been halted on Feb. 10, the only instance of back-to-back suspensions in recent memory.

In the more recent suspension, the S.E.C. also questioned the accuracy of another company statement: that it welcomed the commission's inquiry and offered its full cooperation. The S.E.C. was a bit dubious because the three Davises involved in the company ''have all stated through counsel that they refuse to testify in the investigation in reliance on their Fifth Amendment privileges against self-incrimination.''

Joe Davis says he does intend to talk to the S.E.C. next week. If so, another exciting episode of the saga may be available soon.

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A version of this article appears in print on March 13, 1997, on Page D00008 of the National edition with the headline: Federal sleuthing in penny stocks: Who hired the accountant, and just how deeply was he involved?. Order Reprints|Today's Paper|Subscribe